Reinsurance & Double Insurance | Meaning | Differences
What is Reinsurance?
When a insurance company transfers a part of his risk on a particular policy by insuring it with some other insurance company, it is called Reinsurance. The company that issues the policy originally is known as ‘Direct underwriting‘ or ‘ceding‘ company. The company to which the risk is transferred is called the ‘Reinsurance or Assuming company’ or “Reinsurer“.
Purpose of Reinsurance
The basic purpose of reinsurance is the same as that of an ordinary insurance viz., the risk borne by an individual is greater than he wished to retain. In the same way, every insurer has a limit of the risk that he can undertake at any time a profitable venture comes his way, he may insure it even if the risk involved is beyond his capacity. But in order to safeguard his interests, he may insure the same risk or a part of the risk with other insurers so that the risk is spread.
A company, for instance, issues a fire policy on a forest worth Rs. 5 crores thinking that the risk it has accepted is larger than what is prudent for it to bear, it may reinsure its liability in excess of Rs. 3 crores with another company or companies. Reinsurance is, therefore a contract between two insurance companies and the original contract or insured is not at all affected by it.
What is Double insurance?
Insurance taken on same subject with more than one insurer is called a double insurance. A person can insure his property with two or three companies for the total value of the property and when the loss takes place, he can realize it from all the companies.
Of course, if his total insurance exceeds the actual value of the property, it will be a case of over-insurance and he will not get more than the actual loss. He can however, realize his loss from the companies in any order he likes and the companies will later on adjust their contributions according to the proportion of their insured amounts.
Difference Between Double Insurance and Reinsurance
Double insurance differs from reinsurance on the following counts:
In double insurance, the insured gets the same subject matter insured with more than one insurer or under more than one policy with the same insurer. But the reinsurance business is entered into by the original insurer with other insurers.
2. Filing of claims
In double insurance, claims can be filed with all insurers but restricted to actual loss in case of fire and marine policies. But in reinsurance, the insured will claim compensation from original insurer, who will claim compensation from reinsurer.
In double insurance, contribution will be made by each insurer in proportion to the sum insured. But in reinsurance, reinsurer is not directly required to contribute for losses.